What are Contracts For Difference

CFDs are off-exchange financial instruments designed to allow MFN's clients to trade commission free (MFN is compensated for its services through the spread between the bid/ask price.) and to receive the benefits of owning an exchange-traded instrument without physically owning the instrument. CFD's trade at a fraction of the costs related to traditional stock trading. CFD trading is currently available widespread throughout the World excluding the U.S. Growing exponentially CFD's in the U.K. have been reported to account for up to 25% of England's stock market turnover.

CFD Traders do not take delivery of the instrument and instead settle the difference between the purchase price and sales price. The difference is either a gain or a loss. CFDs are an efficient way to trade shares, equity indices, commodities, and futures with low margin requirements, no commissions, and no exchange fees.

Trading on Margin

One major benefit of trading CFDs is the ability to trade on margin. Unlike traditional exchange-traded instruments where 50% to 100% of the purchase value must be equity in your account, clients can trade CFDs on margin. This means that a client can effectively trade an instrument without having to commit a large amount of account equity. In many cases, the CFD margin requirements are between 0.5% and 10% of the value of the instrument. With any instrument traded on margin, the corresponding leverage can be risky but it also allows clients to trade more instruments with less capital.

Example: One “lot,” or 100 shares, of Coca Cola CFDs can be traded with $50.00 margin. A $3.00 appreciation in the share price of Coca Cola would result in a profit of $300.00.

Increased benefits also bring increased risk. There is the potential of significantly greater profits than traditional share dealing (also known as ‘gearing’).

However, you should note that gearing also means that the potential for losses is equally increased. Because of this, you should read fullly all disclosures, and use only risk capital that will not effect your financial position if lost, before dealing in CFDs. You should consult an independent financial adviser, if you are unsure whether CFDs are a suitable investment for you.

How CFDs Trade

Like all financial instruments traded in a market, CFDs appreciate and depreciate in value according to a variety of factors. When trading a CFD, clients are buying or selling at a transparent price in real-time and their position is immediately marked-to-market. This allows the client to track their profit-and-loss with every tick. Like exchange-traded instruments, CFDs generally trade during certain hours.

Cost of Carry

Trades held past 5:00 p.m. New York time are subject to cost of carry, also called overnight interest. CFDs are leveraged instruments traded on margin hence there is a corresponding finance charge for every day the position is kept opened. Clients who purchase, or go long, a CFD are assessed a cost of carry charge at the end of every trading day. Clients who sell, or go short, a CFD earn the cost of carry at the end of every day.